What are NFTs

How does the artwork of an ape in a hat sell for (at the time of writing) approximately US$100,000? Is right-clicking the image and saving it just as good? NFTs might seem a bit confusing at first but let’s explore how it works, use cases, and the possible future!

Non-fungible tokens (NFTs) are a special type of digital asset that are unique and contain ownership information. Bitcoin is a fungible token, this means that if you swapped out your Bitcoin for another, you would still hold the same value of Bitcoin. Meanwhile, NFTs are non-fungible which means that they cannot be swapped for another. Just like how you would not swap your limited edition sneakers for a different pair and consider it the same thing.

With NFTs, users can prove their ownership of real or digital items. Essentially, the NFT says “the person with this crypto wallet address is the owner of this asset.” This might not sound very useful but in an ever-growing digital world, it is becoming more important.

Some will tell you to think of it from the context of the Mona Lisa. You could buy an imitation or picture of this priceless artwork, but you don’t own the original painting. This is why creators, artists, producers, and more find it valuable to prove they created and own the original pieces. It also passes on to a purchaser who wants to know they are buying an original piece and not a screenshot or imitation.

Remember the blockchain technology we talked about earlier? A big part of how NFTs work is all thanks to blockchain technology. By utilizing its public network, this digital asset is stored in a transparent way. That way, anyone is able to check the authenticity of any NFT at any time.

Every transaction of the NFT is permanently recorded and time stamped on the blockchain. You would be able to trace every action right up to its time of creation. Being able to verify if something is genuine or not is a big part of the value of NFTs.

With NFTs, artists are able to sell their work directly to buyers without the need for a third party like a gallery or auction house. As a result, they get to keep a big part of the profits that they make from sales. Additionally, royalties can be programmed into the digital asset so the creator will continue to earn a percentage of sale profits every time it is sold to a new owner.

Unlike other cryptocurrencies, NFTs cannot be listed, bought, or sold on any exchanges. Users need to use marketplaces to perform any transactions whether it is to list their work, buy, or trade. Popular platforms that you will probably hear about first include OpenSea and Rarible.

NFTs are usually artwork, audio/video clips, and in-game items. These are different forms of art that we are familiar with in the digital space. Fans of video games probably know what it’s like to spend game currency on outfits, weapons, and more.

However, the use cases for NFTs continue to grow. One example is utility NFTs, which are digital assets that have use cases beyond being unique and proving ownership. These NFTs grant the owners privileges, rights, or rewards.

Think of it this way, if you had 20 tickets to a basketball game, you could print out 20 tickets that would let the holder into the stadium. Each ticket would need to be unique in order for you to verify it but the holders would have the same right to entry. Now instead of having physical tickets, you could just issue out 20 utility NFTs and it would work the same way.

For a real-life example, you can see how Kings of Leon released their album, “When You See Yourself” as a series of different utility NFTs. Some holders could redeem a physical limited edition vinyl copy of the album while others could redeem theirs for seats at Kings of Leon shows.

By now you can probably tell that NFTs can provide a unique take on digital ownership. This application can be beneficial for many use cases where ownership will need to be verified. In the future, this might include property, legal contracts, birth certificates, and more. The possibilities are endless but it will be a challenge to get there. Many legal bodies are still trying to understand how NFTs can be applied to legal, regulatory, and tax treatment.

NFTs are a special type of digital asset that enables ownership authentication. At the moment, their functionality is limited to the crypto space but it is not impossible for it to go beyond that. In the future, NFTs could become important instruments for the ownership of tangible assets.

You should be able to answer all the questions below. If you are having trouble answering any of them, go back and review the lesson & the external content.